Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in Internal Control — Integrated Framework (2013), our management, including our chief executive officer and chief financial officer, concluded that our internal control over financial reporting was effective as of December 31, 2017.

The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Waters Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Waters Corporation and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2017 appearing under Item 15(c) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based payment transactions in 2017.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 27, 2018

We have served as the Company’s auditor since 1994.

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	December 31,
	2017			2016
	(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	642,319		$	505,631
Investments		2,751,382			2,307,401
Accounts receivable, net		533,825			489,340
Inventories		270,294			262,682
Other current assets		72,314			70,391

Total current assets		4,270,134			3,635,445
Property, plant and equipment, net		349,278			337,118
Intangible assets, net		228,395			207,055
Goodwill		359,819			352,080
Other assets		116,728			130,361

Total assets	$	5,324,354		$	4,662,059

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and debt	$	100,273		$	125,297
Accounts payable		64,537			67,740
Accrued employee compensation		69,024			57,465
Deferred revenue and customer advances		166,840			148,837
Accrued income taxes		73,008			15,244
Accrued warranty		13,026			13,391
Other current liabilities		119,449			92,347

Total current liabilities		606,157			520,321
Long-term liabilities:
Long-term debt		1,897,501			1,701,966
Long-term portion of retirement benefits		67,334			72,568
Long-term income tax liabilities		456,949			10,458
Other long-term liabilities		62,625			54,797

Total long-term liabilities		2,484,409			1,839,789

Total liabilities		3,090,566			2,360,110
Commitments and contingencies (Notes 5, 8, 9, 10, 11 and 15)
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued at December 31, 2017 and December 31, 2016		—			—
Common stock, par value $0.01 per share, 400,000 shares authorized, 159,845 and 158,634 shares issued, 79,337 and 80,023 shares outstanding at December 31, 2017 and December 31, 2016, respectively		1,598			1,586
Additional paid-in capital		1,745,088			1,607,241
Retained earnings		5,405,380			5,385,069
Treasury stock, at cost, 80,509 and 78,611 shares at December 31, 2017 and December 31, 2016, respectively		(4,808,211	)		(4,475,667	)
Accumulated other comprehensive loss		(110,067	)		(216,280	)

Total stockholders’ equity		2,233,788			2,301,949

Total liabilities and stockholders’ equity	$	5,324,354		$	4,662,059

The accompanying notes are an integral part of the consolidated financial statements.

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


	Year Ended December 31,
	2017			2016			2015
	(In thousands, except per share data)
Revenues:
Product sales	$	1,552,349		$	1,460,296		$	1,385,256
Service sales		756,729			707,127			657,076

Total net sales		2,309,078			2,167,423			2,042,332
Costs and operating expenses:
Cost of product sales		623,214			595,796			565,630
Cost of service sales		323,853			295,657			277,042
Selling and administrative expenses		544,703			513,031			495,747
Research and development expenses		132,593			125,187			118,545
Litigation provisions (Note 11)		11,114			3,524			3,939
Purchased intangibles amortization		6,743			9,889			10,123
Acquired in-process research and development (Note 2)		5,000			—			3,855

Total costs and operating expenses		1,647,220			1,543,084			1,474,881

Operating income		661,858			624,339			567,451
Interest expense		(56,839	)		(44,911	)		(36,243	)
Interest income		36,078			20,686			10,711

Income before income taxes		641,097			600,114			541,919
Provision for income taxes		620,786			78,611			72,866

Net income	$	20,311		$	521,503		$	469,053

Net income per basic common share	$	0.25		$	6.46		$	5.70
Weighted-average number of basic common shares		79,793			80,786			82,336
Net income per diluted common share	$	0.25		$	6.41		$	5.65
Weighted-average number of diluted common shares and equivalents		80,604			81,417			83,087

The accompanying notes are an integral part of the consolidated financial statements.

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Net income	$	20,311		$	521,503		$	469,053
Other comprehensive income (loss):
Foreign currency translation		101,148			(66,996	)		(70,481	)
Unrealized (losses) gains on investments before income taxes		(1,794	)		279			(1,825	)
Income tax benefit		68			111			31

Unrealized (losses) gains on investments, net of tax		(1,726	)		390			(1,794	)
Retirement liability adjustment before reclassifications		7,832			(6,783	)		191
Amounts reclassified to selling and administrative expenses		3,948			3,263			4,443

Retirement liability adjustment before income taxes		11,780			(3,520	)		4,634
Income tax (expense) benefit		(4,989	)		572			(380	)

Retirement liability adjustment, net of tax		6,791			(2,948	)		4,254
Other comprehensive income (loss)		106,213			(69,554	)		(68,021	)

Comprehensive income	$	126,524		$	451,949		$	401,032

The accompanying notes are an integral part of the consolidated financial statements.

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Cash flows from operating activities:
Net income	$	20,311		$	521,503		$	469,053
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		39,436			40,998			33,368
Deferred income taxes		45,510			1,204			6,581
Depreciation		61,450			51,684			45,287
Amortization of intangibles		44,552			44,765			44,700
Excess tax benefit related to stock option plans		—			13,844			12,955
Gain on sale of assets		—			(1,500	)		(1,377	)
In-process research and development and other non-cash charges		5,000			—			4,638
Change in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable		(24,013	)		(31,721	)		(49,888	)
Decrease (increase) in inventories		731			(20,147	)		(19,967	)
Increase in other current assets		(16,323	)		(2,436	)		(17,206	)
Increase in other assets		(24,098	)		(1,076	)		(9,634	)
Increase in accounts payable and other current liabilities		3,175			6,842			27,451
Increase in deferred revenue and customer advances		10,386			9,974			16,172
Effect of the 2017 Tax Act		530,383			—			—
Increase in other liabilities		1,140			8,986			11,115

Net cash provided by operating activities		697,640			642,920			573,248
Cash flows from investing activities:
Additions to property, plant, equipment and software capitalization		(85,473	)		(94,967	)		(100,012	)
Business acquisitions, net of cash acquired		—			(5,609	)		(23,494	)
Investment in unaffiliated company		(7,000	)		—			—
Payments for intellectual property licenses		(5,000	)		—			(3,000	)
Purchases of investments		(2,960,379	)		(2,396,032	)		(2,010,368	)
Maturities and sales of investments		2,522,100			2,004,690			1,731,981
Proceeds from sale of assets		—			4,000			5,154

Net cash used in investing activities		(535,752	)		(487,918	)		(399,739	)
Cash flows from financing activities:
Proceeds from debt issuances		1,480,190			485,298			325,219
Payments on debt		(1,310,214	)		(325,323	)		(120,140	)
Payments of debt issuance costs		(2,984	)		(1,705	)		(2,382	)
Proceeds from stock plans		97,789			62,189			52,060
Purchases of treasury shares		(332,544	)		(325,759	)		(334,705	)
Proceeds from (payments for) derivative contracts		3,894			(10,401	)		(2,601	)

Net cash used in financing activities		(63,869	)		(115,701	)		(82,549	)
Effect of exchange rate changes on cash and cash equivalents		38,669			(21,335	)		(25,472	)

Increase in cash and cash equivalents		136,688			17,966			65,488
Cash and cash equivalents at beginning of period		505,631			487,665			422,177

Cash and cash equivalents at end of period	$	642,319		$	505,631		$	487,665

Supplemental cash flow information:
Income taxes paid	$	70,583		$	50,007		$	51,750
Interest paid	$	56,503		$	43,595		$	37,396

The accompanying notes are an integral part of the consolidated financial statements.

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	(In thousands)
Balance December 31, 2014		156,716	$	1,567	$	1,392,494	$	4,394,513	$	(3,815,203	)	$	(78,705	)	$	1,894,666
Net income		—		—		—		469,053		—			—			469,053
Other comprehensive loss		—		—		—		—		—			(68,021	)		(68,021	)
Issuance of common stock for employees:
Employee Stock Purchase Plan		53		1		5,495		—		—			—			5,496
Stock options exercised		727		7		46,557		—		—			—			46,564
Tax benefit related to stock option plans		—		—		12,955		—		—			—			12,955
Treasury stock		—		—		—		—		(334,705	)		—			(334,705	)
Stock-based compensation		181		2		32,841		—		—			—			32,843

Balance December 31, 2015		157,677	$	1,577	$	1,490,342	$	4,863,566	$	(4,149,908	)	$	(146,726	)	$	2,058,851

Net income		—		—		—		521,503		—			—			521,503
Other comprehensive loss		—		—		—		—		—			(69,554	)		(69,554	)
Issuance of common stock for employees:
Employee Stock Purchase Plan		53		1		6,277		—		—			—			6,278
Stock options exercised		730		7		55,904		—		—			—			55,911
Tax benefit related to stock option plans		—		—		13,844		—		—			—			13,844
Treasury stock		—		—		—		—		(325,759	)		—			(325,759	)
Stock-based compensation		174		1		40,874		—		—			—			40,875

Balance December 31, 2016		158,634	$	1,586	$	1,607,241	$	5,385,069	$	(4,475,667	)	$	(216,280	)	$	2,301,949

Net income		—		—		—		20,311		—			—			20,311
Other comprehensive income		—		—		—		—		—			106,213			106,213
Issuance of common stock for employees:
Employee Stock Purchase Plan		50		1		6,874		—		—			—			6,875
Stock options exercised		972		10		90,904		—		—			—			90,914
Treasury stock		—		—		—		—		(332,544	)		—			(332,544	)
Stock-based compensation		189		1		40,069		—		—			—			40,070

Balance December 31, 2017		159,845	$	1,598	$	1,745,088	$	5,405,380	$	(4,808,211	)	$	(110,067	)	$	2,233,788

The accompanying notes are an integral part of the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 Description of Business and Organization

Waters Corporation (the “Company”) is a specialty measurement company that has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for nearly 60 years. The Company primarily designs, manufactures, sells and services high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC®” 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® product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments.

2 Basis of Presentation and Summary of Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, product returns and allowances, bad debts, inventory valuation, goodwill and intangible assets, income taxes, warranty and installation provisions, litigation, retirement plan obligations, stock-based compensation, equity investments and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts may differ from these estimates under different assumptions or conditions.

Risks and Uncertainties

The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. The Company consolidates entities in which it owns or controls fifty percent or more of the voting shares. All inter-company balances and transactions have been eliminated.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 period. Any resulting translation gains or losses are included in accumulated other comprehensive income in the consolidated balance sheets. The Company’s net sales derived from operations outside the United States were 71%, 69% and 68% in 2017, 2016 and 2015, respectively. Gains and losses from foreign currency transactions are included in net income in the consolidated statements of operations. In 2017, 2016 and 2015 foreign currency transactions resulted in net losses of $1 million and $4 million, and a net gain of $3 million, respectively.

Seasonality of Business

Cash, Cash Equivalents and Investments

Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, primarily in bank deposits, U.S. treasury bill money market funds and commercial paper. Investments with longer maturities are classified as investments, and are held primarily in U.S. treasury bills, U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities.

Investments are classified as available-for-sale in accordance with the accounting standards for investments in debt and equity securities. All available-for-sale securities are recorded at fair market value and any unrealized holding gains and losses, to the extent deemed temporary, are included in accumulated other comprehensive income in stockholders’ equity, net of the related tax effects. If any adjustment to fair value reflects a decline in the value of the investment, the Company considers all available evidence to evaluate the extent to which the decline is “other than temporary” and, if so, records a loss as a charge to the statement of operations. The Company classifies its investments exclusive of those categorized as cash equivalents.

The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of December 31, 2017 and 2016, $3,326 million out of $3,394 million and $2,766 million out of $2,813 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $304 million out of $3,394 million and $261 million out of $2,813 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at December 31, 2017 and 2016, respectively.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses in the existing accounts receivable. The allowance is based on a number of factors, including historical experience and the customer’s credit-worthiness. The allowance for doubtful accounts is reviewed on at least a quarterly basis. Past due balances over

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged against the allowance when the Company determines it is probable that the receivable will not be recovered. The Company does not have any off-balance sheet credit exposure related to its customers. The allowance for sales returns is the best estimate of the amount of future product returns related to current period revenue and is based on historical experience.

The following is a summary of the activity of the Company’s allowance for doubtful accounts and sales returns for the years ended December 31, 2017, 2016 and 2015 (in thousands):


	Balance at Beginning of Period		Additions		Deductions			Balance at End of Period
Allowance for Doubtful Accounts and Sales Returns:
2017	$	8,657	$	9,059	$	(8,386	)	$	9,330
2016	$	7,496	$	6,912	$	(5,751	)	$	8,657
2015	$	7,179	$	6,739	$	(6,422	)	$	7,496

Concentration of Credit Risk

The Company sells its products and services to a significant number of large and small customers throughout the world, with net sales to the pharmaceutical industry of approximately 56% in both 2017 and 2016 and 54% in 2015. None of the Company’s individual customers accounted for more than 2% of annual Company sales in 2017, 2016 or 2015. The Company performs continuing credit evaluations of its customers and generally does not require collateral, but in certain circumstances may require letters of credit or deposits. Historically, the Company has not experienced significant bad debt losses.

Inventory

The Company values all of its inventories at the lower of cost or net realizable value on a first-in, first-out basis (“FIFO”).

Income Taxes

Deferred income taxes are recognized for temporary differences between the financial statement and income tax basis of assets and liabilities using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Appropriate long-term liabilities have also been recorded to recognize uncertain tax return reporting positions.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to expense, while the costs of significant improvements are capitalized. Depreciation is provided using the straight-line method over the following estimated useful lives: buildings — fifteen to thirty years; building improvements — five to ten years; leasehold improvements — the shorter of the economic useful life or life of lease; and production and other equipment — three to ten years. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the consolidated balance sheets and related gains or losses are reflected in the consolidated statements of operations.

Asset Impairments

The Company reviews its long-lived assets for impairment in accordance with the accounting standards for property, plant and equipment. Whenever events or circumstances indicate that the carrying amount of an asset

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

may not be recoverable, the Company evaluates the recoverability of the carrying value of the asset based on the expected future cash flows, relying on a number of factors, including, but not limited to, operating results, business plans, economic projections and anticipated future cash flows. If the asset is deemed not recoverable, it is written down to fair value and the impairment is recorded in the consolidated statements of operations.

Business Combinations and Asset Acquisitions

The Company accounts for business acquisitions under the accounting standards for business combinations. The results of each acquisition are included in the Company’s consolidated results as of the acquisition date and the purchase price of an acquisition is allocated to tangible and intangible assets and assumed liabilities based on their estimated fair values. Any excess of the fair value consideration transferred over the estimated fair values of the net assets acquired is recognized as goodwill. Acquired in-process research and development (“IPR&D”) included in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred and acquired IPR&D is tested for impairment annually until completion of the acquired programs. Upon commercialization, this indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life, subject to periodic impairment reviews. If the research and development project is abandoned, the indefinite-lived asset is charged to expense. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred.

The Company also acquires intellectual property through licensing arrangements. These arrangements often require upfront payments and may include additional milestone or royalty payments, contingent upon certain future events. IPR&D acquired in an asset acquisition (as opposed to a business combination) is expensed immediately unless there is an alternative future use. Subsequent payments made for the achievement of milestones are evaluated to determine whether they have an alternative future use or should be expensed. Payments made to third parties subsequent to commercialization are capitalized and amortized over the remaining useful life of the related asset, and are classified as intangible assets.

Goodwill and Other Intangible Assets

The Company tests for goodwill impairment using a fair-value approach at the reporting unit level annually, or earlier, if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Additionally, the Company performs an annual goodwill impairment assessment for its reporting units as of January 1 each year. The goodwill and other intangible assets accounting standards define a reporting unit as an operating segment, or one level below an operating segment, if discrete financial information is prepared and reviewed by management. For goodwill impairment review purposes, the Company has two reporting units: Waters® and TA®. Goodwill is allocated to the reporting units at the time of acquisition. Under the impairment test, if a reporting unit’s carrying amount exceeds its estimated fair value, goodwill impairment is recognized to the extent that the carrying amount of goodwill exceeds the implied fair value of the goodwill. The fair value of reporting units was estimated using a discounted cash flows technique, which includes certain management assumptions, such as estimated future cash flows, estimated growth rates and discount rates.

The Company’s intangible assets include purchased technology; capitalized software development costs; costs associated with acquiring Company patents, trademarks and intellectual properties, such as licenses; debt issuance costs and acquired IPR&D. Purchased intangibles are recorded at their fair market values as of the acquisition date and amortized over their estimated useful lives, ranging from one to fifteen years. Other intangibles are amortized over a period ranging from one to ten years. Debt issuance costs are amortized over the life of the related debt. Acquired IPR&D is amortized from the date of completion of the acquired program over its estimated useful life. IPR&D and indefinite-lived intangibles are tested annually for impairment.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Software Development Costs

The Company capitalizes internal and external software development costs for products offered for sale in accordance with the accounting standards for the costs of software to be sold, leased, or otherwise marketed. Capitalized costs are amortized to cost of sales over the period of economic benefit, which approximates a straight-line basis over the estimated useful lives of the related software products, generally three to ten years. The Company capitalized $35 million and $33 million of direct expenses that were related to the development of software in 2017 and 2016, respectively. Net capitalized software included in intangible assets totaled $153 million and $132 million at December 31, 2017 and 2016, respectively. See Note 7, “Goodwill and Other Intangibles”.

The Company capitalizes internal software development costs for internal use in accordance with the accounting standards for goodwill and other intangible assets. Capitalized internal software development costs are amortized over the period of economic benefit, which approximates a straight-line basis over ten years. Net capitalized internal software included in property, plant and equipment totaled $3 million at both December 31, 2017 and 2016.

Other Investments

The Company accounts for its investments that represent less than twenty percent ownership, and for which the Company does not have significant influence, using the accounting standards for investments in debt and equity securities. Investments for which the Company does not have the ability to exercise significant influence, and for which there is not a readily determinable market value, are accounted for under the cost method of accounting. The Company periodically evaluates the carrying value of its investments accounted for under the cost method of accounting and carries them at the lower of cost or estimated net realizable value. For investments in which the Company owns or controls between twenty and forty-nine percent of the voting shares, or over which it exerts significant influence over operating and financial policies, the equity method of accounting is used. The Company’s share of net income or losses of equity investments is included in the consolidated statements of operations and was not material in any period presented.

During the year ended December 31, 2017, the Company made a $7 million investment in a developer of analytical system solutions used to make measurements, predict stability and accelerate product discovery in the routine analytic, process monitoring and quality control release processes for life science and biopharmaceutical markets. This investment was accounted for under the cost method of accounting.

During the year ended December 31, 2016, the Company sold an equity investment that was accounted for using the equity method of accounting and was included in other assets in the consolidated balance sheet for $4 million in cash.

Fair Value Measurements

In accordance with the accounting standards for fair value measurements and disclosures, certain of the Company’s assets and liabilities are measured at fair value on a recurring basis as of December 31, 2017 and 2016. 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2017 (in thousands):


	Total at December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury securities	$	591,988	$	—	$	591,988	$	—
Foreign government securities		6,952		—		6,952		—
Corporate debt securities		1,975,160		—		1,975,160		—
Time deposits		371,511		—		371,511		—
Equity securities		147		—		147		—
Waters 401(k) Restoration Plan assets		35,645		35,645		—		—
Foreign currency exchange contracts		566		—		566		—

Total	$	2,981,969	$	35,645	$	2,946,324	$	—

Liabilities:
Contingent consideration	$	3,247	$	—	$	—	$	3,247
Foreign currency exchange contracts		182		—		182		—

Total	$	3,429	$	—	$	182	$	3,247

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2016 (in thousands):


	Total at December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury securities	$	570,313	$	—	$	570,313	$	—
Foreign government securities		17,991		—		17,991		—
Corporate debt securities		1,643,838		—		1,643,838		—
Time deposits		199,906		—		199,906		—
Equity securities		147		—		147		—
Waters 401(k) Restoration Plan assets		30,954		30,954		—		—
Foreign currency exchange contracts		60		—		60		—

Total	$	2,463,209	$	30,954	$	2,432,255	$	—

Liabilities:
Contingent consideration	$	3,007	$	—	$	—	$	3,007
Foreign currency exchange contracts		730		—		730		—

Total	$	3,737	$	—	$	730	$	3,007

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fair Value of Cash Equivalents, Investment and Foreign Currency Exchange Contracts

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 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 December 31, 2017 and December 31, 2016, 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 cash, 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 $610 million at December 31, 2017 and 2016. 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 $608 million and $603 million at December 31, 2017 and 2016, 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 strategy in managing exposure to changes in foreign currency exchange rates is to 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.

The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. At December 31, 2017, 2016 and 2015, the Company held foreign currency exchange contracts with notional amounts totaling $147 million, $120 million and $116 million, respectively.

The Company’s foreign currency exchange contracts included in the consolidated balance sheets are classified as follows (in thousands):


	December 31, 2017		December 31, 2016
Other current assets	$	566	$	60
Other current liabilities	$	182	$	730

The following is a summary of the activity included in cost of sales in the statements of operations related to the foreign currency exchange contracts (in thousands):


	Year Ended December 31,
	2017		2016			2015
Realized gains (losses) on closed contracts	$	3,894	$	(10,401	)	$	(2,601	)
Unrealized gains (losses) on open contracts		1,054		(883	)		742

Cumulative net pre-tax gains (losses)	$	4,948	$	(11,284	)	$	(1,859	)

Stockholders’ Equity

In May 2017, the Company’s Board of Directors authorized the Company to repurchase up to $1 billion of its outstanding common stock over a three-year period. During 2017, 2016 and 2015, the Company repurchased 1.8 million, 2.3 million and 2.6 million shares of the Company’s outstanding common stock at a cost of $323 million, $318 million and $327 million, respectively, under the May 2017 authorization and other previously announced programs. As of December 31, 2017, the Company repurchased an aggregate of 5.5 million shares at a cost of $750 million under the May 2014 repurchase program, which is now completed. As of December 31, 2017, the Company repurchased an aggregate of 1.1 million shares at a cost of $200 million under the May 2017 repurchase program and has a total of $800 million authorized for future repurchases. In addition, the Company repurchased $10 million, $8 million and $7 million of common stock related to the vesting of restricted stock units during the years ended December 31, 2017, 2016 and 2015, respectively. The Company believes that it has the financial flexibility to fund these share repurchases given current cash levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company’s sales and profits.

Revenue Recognition

Sales of products and services are generally recorded based on product shipment and performance of service, respectively. The Company’s deferred revenue on the consolidated balance sheets consists of the obligation on instrument service contracts and customer payments received in advance, prior to shipment of the instrument. Revenue is recognized when all of the following revenue recognition criteria are met: persuasive evidence of an arrangement exists; delivery or performance has occurred; the vendor’s fee is fixed or determinable; collectibility

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

is reasonably assured and, if applicable, upon acceptance when acceptance criteria with contractual cash holdback are specified. Shipping and handling costs invoiced to the customer are included in net sales, while the costs associated with shipping and handling are included in cost of sales.

Product shipments and service contracts are not recorded as revenue until a valid purchase order or master agreement is received, specifying fixed terms and prices. The Company generally recognizes product revenue when legal title has transferred and risk of loss passes to the customer. The Company generally structures its sales arrangements as shipping point or international equivalent and, accordingly, recognizes revenue upon shipment. In some cases, destination-based shipping terms are included in sales arrangements, in which cases revenue is generally recognized when the products arrive at the customer site.

The Company’s method of revenue recognition for certain products requiring installation is accounted for in accordance with multiple-element revenue recognition accounting standards. With respect to the installation obligations, the larger of the contractual cash holdback or the best estimate of selling price of the installation service is deferred when the product is shipped and revenue is recognized as a multiple-element arrangement when installation is complete. The Company determines the best estimate of selling price of installation based upon a number of factors, including hourly service billing rates and estimated installation hours.

Instrument service contracts are typically billed at the beginning of the maintenance period. The amount of the service contract is amortized ratably to revenue over the instrument maintenance period. There are no deferred costs associated with the service contract, as the cost of the service is recorded when the service is performed. No revenue is recognized until all revenue recognition criteria have been met.

Sales of standalone software are accounted for in accordance with the accounting standards for software revenue recognition. The Company’s software arrangements typically include software licenses and maintenance contracts. Software license revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, collection is probable, and there are no significant post-delivery obligations remaining. The revenue associated with the software maintenance contract is recognized ratably over the maintenance term. Unspecified rights to software upgrades are typically sold as part of the maintenance contract on a when-and-if-available basis. The Company uses the residual method to allocate software revenue when a transaction includes multiple elements and vendor specific objective evidence of fair value of undelivered elements exists. Under the residual method, the fair value of the undelivered element (maintenance) is deferred and the remaining portion of the arrangement fee is allocated to the delivered element (software license) and recognized as revenue.

Returns and customer credits are infrequent and are recorded as a reduction to sales. Rights of return are not included in sales arrangements. Revenue associated with products that contain specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. Discounts from list prices are recorded as a reduction to sales.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following is a summary of the activity of the Company’s accrued warranty liability for the years ended December 31, 2017, 2016 and 2015 (in thousands):


	Balance at Beginning of Period		Accruals for Warranties		Settlements Made			Balance at End of Period
Accrued warranty liability:
2017	$	13,391	$	8,746	$	(9,111	)	$	13,026
2016	$	13,349	$	9,755	$	(9,713	)	$	13,391
2015	$	13,266	$	8,390	$	(8,307	)	$	13,349

Advertising Costs

All advertising costs are expensed as incurred and are included in selling and administrative expenses in the consolidated statements of operations. Advertising expenses were $6 million for 2017 and were $11 million for both 2016 and 2015.

Research and Development Expenses

Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries and benefits, facilities costs, overhead costs, contract services and other outside costs. Research and development expenses are expensed as incurred. During 2017 and 2015, the Company incurred $5 million and $4 million charges, respectively, for acquired in-process research and development related to the licensing of certain intellectual property relating to mass spectrometry technologies yet to be commercialized and for which there was no future alternative use as of the acquisition date. These licensing arrangements are significantly related to new, biologically-focused applications, as well as other applications, and require the Company to make additional future payments of up to $7 million if certain milestones are achieved, as well as royalties on future net sales.

Stock-Based Compensation

The Company has two stock-based compensation plans, which are described in Note 12, “Stock-Based Compensation”.

Earnings Per Share

In accordance with the earnings per share accounting standards, the Company presents two earnings per share (“EPS”) amounts. Income per basic common share is based on income available to common shareholders and the weighted-average number of common shares outstanding during the periods presented. Income per diluted common share includes additional dilution from potential common stock, such as stock issuable pursuant to the exercise of stock options outstanding.

Retirement Plans

The Company sponsors various retirement plans, which are described in Note 15, “Retirement Plans”.

Comprehensive Income

The Company accounts for comprehensive income in accordance with the accounting standards for comprehensive income, which establish the accounting rules for reporting and displaying comprehensive income. These standards require that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Recently Adopted Accounting Standards

In July 2015, accounting guidance was issued which clarifies the measurement of inventory. The new guidance requires inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for annual and interim periods beginning after December 15, 2016. The Company adopted this standard as of January 1, 2017 and this standard did not have a material effect on the Company’s financial position, results of operations and cash flows.

In March 2016, accounting guidance was issued which simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance was effective for annual and interim reporting periods beginning after December 15, 2016. The new guidance is required to be adopted on a prospective basis for the statement of operations and the Company has elected to retrospectively apply the cash flow aspects of this new guidance. In addition, the Company has elected to continue to estimate forfeitures at the time of grant and update forfeiture estimates throughout the requisite service period. The Company adopted this standard as of January 1, 2017 and recognized an excess tax benefit related to stock-based compensation which decreased income tax expense for 2017 by $20 million and added $0.24 to net income per diluted share. These excess tax benefits were previously recorded in equity and there were no cumulative-effect adjustments to retained earnings as a result of the adoption of this standard. In addition, the Company reclassified $14 million and $13 million of excess tax benefits related to stock-based compensation from cash flows from financing activities to cash flows from operating activities for 2016 and 2015, respectively.

Recently Issued Accounting Standards

In May 2014, amended accounting guidance was issued regarding the recognition of revenue from contracts with customers. The objective of this guidance is to significantly enhance comparability and clarify principles of revenue recognition practices across entities, industries, jurisdictions and capital markets. This guidance was originally effective for annual and interim reporting periods beginning after December 15, 2016; however, the Financial Accounting Standards Board (“FASB”) amended the standard in August 2015 to delay the effective period date by one year to annual and interim periods beginning after December 15, 2017. Adoption prior to December 15, 2016 was not permitted. In March 2016, the FASB clarified the implementation guidance on principal versus agent considerations and, in April 2016, clarification was made regarding certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, additional guidance was issued related to disclosure of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes collected from customers. The Company did not early adopt this accounting standard and will apply the modified-retrospective method. 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 2016, accounting guidance was issued which primarily affects the classification and measurement of certain financial instruments, principally equity investments and certain financial liabilities. Under the new guidance, there will no longer be an available-for-sale classification for equity securities with readily determinable fair values. Changes to the fair value of equity investments will be recognized through earnings. Equity investments carried at cost should be adjusted for changes in observable prices, as applicable, and qualitatively assessed for impairment annually. Changes to the fair value of financial liabilities under the fair value option due to instrument specific credit risk will be recognized separately in other comprehensive income. The new guidance also requires financial assets and financial liabilities to be presented separately and grouped by measurement category in the notes to the financial statements. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption of certain provisions of this guidance is

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

permitted. The Company currently does not expect that the adoption of this standard will have a material effect on the Company’s financial position, results of operations and cash flows.

In February 2016, accounting guidance was issued regarding the accounting for leases. This new comprehensive lease standard amends various aspects of existing accounting guidance for leases. The core principle of the new guidance will require lessees to present the assets and liabilities that arise from leases on their balance sheets. This guidance is effective for annual and interim reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company expects that the adoption of this standard will have a material effect on the Company’s balance sheet; however, it is not expected to have an overall material impact on the Company’s results of operations and cash flows. Please see Note 11, “Other Commitments and Contingencies”, for additional information.

In June 2016, accounting guidance was issued that modifies the recognition of credit losses related to financial assets, such as debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, and other financial assets that have the contractual right to receive cash. Current guidance requires the recognition of a credit loss when it is considered probable that a loss event has occurred. The new guidance requires the measurement of expected credit losses to be based upon relevant information, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the asset. As such, expected credit losses may be recognized sooner under the new guidance due to the broader range of information that will be required to determine credit loss estimates. The new guidance also amends the current other-than-temporary impairment model used for debt securities classified as available-for-sale. When the fair value of an available-for-sale debt security is below its amortized cost, the new guidance requires the total unrealized loss to be bifurcated into its credit and non-credit components. Any expected credit losses or subsequent recoveries will be recognized in earnings and any changes not considered credit related will continue to be recognized within other comprehensive income. This guidance is effective for annual and interim periods beginning after December 15, 2019. The Company currently does not expect that the adoption of this standard will have a material effect on the Company’s financial position, results of operations and cash flows.

In August 2016, accounting guidance was issued that clarifies the classification of certain cash flows. The new guidance addresses eight specific areas where current accounting guidance is either unclear or does not specifically address classification issues. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company currently does not believe that the adoption of this standard will have a material impact on the Company’s cash flows.

In October 2016, accounting guidance was issued regarding intra-entity transfers of assets other than inventory. The new guidance eliminates the deferral of tax effects on intra-entity transfers other than inventory and requires an entity to recognize the income tax consequences when the transfer occurs. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company does not believe 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 2017, accounting guidance was issued that clarifies the definition of a business. The new guidance provides a more robust framework to use in determining when a set of assets and activities is a business, thus narrowing the definition and the amount of transactions accounted for as business combinations. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early application is permitted under certain circumstances. The Company will apply this guidance prospectively to any business combination transactions that take place after adoption of this new guidance.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

allocation. This guidance is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. The Company currently does not expect that the adoption of this standard will have a material effect on the Company’s financial position, results of operations and cash flows.

In March 2017, accounting guidance was issued regarding the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires that an employer disaggregate the service cost component from other components of net benefit cost, with service cost reported in the same line items as other compensation costs and the other components of net benefit costs presented outside income from operations. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company currently does not believe that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows. Please see Note 15, “Retirement Plans”, for additional information.

In March 2017, accounting guidance was issued to amend the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amortization period for certain callable debt securities will be shortened to end at the earliest call date. This guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company currently does not believe that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.

In May 2017, accounting guidance was issued that clarifies the accounting for a change to the terms or conditions of a share-based payment award. The standard provides more specific guidance for determining when a change to an award requires modification accounting and when it should be deemed purely administrative in nature. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company currently does not believe that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.

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):


	December 31, 2017
	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
U.S. Treasury securities	$	593,599	$	82	$	(1,693	)	$	591,988
Foreign government securities		6,982		—		(30	)		6,952
Corporate debt securities		1,977,329		897		(3,066	)		1,975,160
Time deposits		371,515		—		(4	)		371,511
Equity securities		77		70		—			147

Total	$	2,949,502	$	1,049	$	(4,793	)	$	2,945,758


Amounts included in:
Cash equivalents	$	194,377	$	—	$	(1	)	$	194,376
Investments		2,755,125		1,049		(4,792	)		2,751,382

Total	$	2,949,502	$	1,049	$	(4,793	)	$	2,945,758

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	December 31, 2016
	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
U.S. Treasury securities	$	570,695	$	253	$	(635	)	$	570,313
Foreign government securities		17,999		—		(8	)		17,991
Corporate debt securities		1,645,468		496		(2,126	)		1,643,838
Time deposits		199,906		—		—			199,906
Equity securities		77		70		—			147

Total	$	2,434,145	$	819	$	(2,769	)	$	2,432,195


Amounts included in:
Cash equivalents	$	124,793	$	1	$	—		$	124,794
Investments		2,309,352		818		(2,769	)		2,307,401

Total	$	2,434,145	$	819	$	(2,769	)	$	2,432,195

The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):


	December 31, 2017		December 31, 2016
Due in one year or less	$	1,722,553	$	1,388,537
Due after one year through three years		851,547		843,605

Total	$	2,574,100	$	2,232,142

Realized gains and losses on sales of investments were not material in 2017, 2016 and 2015.

4 Inventories

Inventories are classified as follows (in thousands):


	December 31,
	2017		2016
Raw materials	$	99,033	$	95,430
Work in progress		15,324		16,585
Finished goods		155,937		150,667

Total inventories	$	270,294	$	262,682

During 2017, 2016 and 2015, the Company recorded inventory-related excess and obsolescence provisions of $2 million, $9 million and $5 million, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5 Property, Plant and Equipment

Property, plant and equipment consist of the following (in thousands):


	December 31,
	2017			2016
Land and land improvements	$	37,525		$	35,720
Buildings and leasehold improvements		294,219			274,021
Production and other equipment		484,475			438,604
Construction in progress		22,140			20,204

Total property, plant and equipment		838,359			768,549
Less: accumulated depreciation and amortization		(489,081	)		(431,431	)

Property, plant and equipment, net	$	349,278		$	337,118

During 2017, 2016 and 2015, the Company retired and disposed of approximately $15 million, $15 million and $29 million of property, plant and equipment, respectively, most of which was fully depreciated and no longer in use. Gains on disposal were immaterial for the years ended December 31, 2017 and 2016.

In February 2018, the Company’s Board of Directors approved expanding its chemistry synthesis operations. 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 and investments. The Company does not expect to issue any debt in relation to this expansion.

6 Acquisitions

In September 2016, the Company acquired all of the outstanding stock of Rubotherm GmbH (“Rubotherm”), a manufacturer of gravimetric analysis systems, for approximately $6 million in cash, $5 million of which was paid at closing and an additional $1 million paid after closing to settle certain liabilities. Rubotherm develops and manufactures analytical test instruments for thermogravimetric and sorption measurements that are used in both industrial and academic research laboratories in disciplines that include chemistry, material science and engineering. The Rubotherm acquisition will help support and further expand product offerings within TA’s thermal analysis business.

In November 2015, the Company acquired all of the outstanding stock of MPE Orbur Group Limited and its sole operating subsidiary, Midland Precision Equipment Company, Ltd. (“MPE”), a manufacturer of MS instrumentation components, for $12 million, net of cash acquired. MPE is a highly skilled manufacturer and former Waters supplier that produces critical components that support the Company’s MS instrument systems. MPE was acquired to bring this key supplier in house to reduce manufacturing costs in the future and to reduce risk to our supply chain.

In the fourth quarter of 2015, the Company acquired certain assets of its Malaysian sales and service distributor for $2 million in cash.

In May 2015, the Company acquired the net assets of the ElectroForce® business of the Bose Corporation (“ElectroForce”), a manufacturer of testing systems, for $9 million in cash. ElectroForce’s core business is the manufacturing of dynamic mechanical testing systems used to characterize medical devices, biologic and engineered materials. The ElectroForce test instruments are based on unique motor designs that are quiet, energy-efficient, scalable and deliver precise performance over a wide range of force and frequency. ElectroForce was acquired to expand TA’s product offering into new markets, while leveraging the technology, infrastructure and customer bases of the combined organizations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The principal factor that resulted in recognition of goodwill in these acquisitions is 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 is of considerably greater value than utilizing each of the acquired companies’ technology, customer access or products on a standalone basis. The goodwill also includes value assigned to assembled workforce, which cannot be recognized as an intangible asset. Specifically, the goodwill acquired with MPE consists of the value assigned to its workforce and the future incremental sales synergies anticipated.

In each acquisition, the sellers provided the Company with customary representations, warranties and indemnification, which would be settled in the future if and when a breach of the contractual representation or warranty condition occurs. The pro forma effect of the ongoing operations for Waters Corporation, Rubotherm, MPE, the Malaysian sales and service distributor and ElectroForce, either individually or in the aggregate, as though these acquisitions had occurred at the beginning of the periods covered by this report was immaterial.

7 Goodwill and Other Intangibles

The carrying amount of goodwill was $360 million and $352 million at December 31, 2017 and 2016, respectively. During the year ended December 31, 2017, the effect of foreign currency translation increased goodwill by $8 million.

The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (in thousands):


	December 31, 2017						December 31, 2016
	Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period		Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period
Capitalized software	$	438,652	$	285,461		5 years	$	355,973	$	223,572		5 years
Purchased intangibles		169,870		138,750		11 years		162,180		127,045		11 years
Trademarks and IPR&D		13,923		—		—		13,544		—		—
Licenses		5,840		4,628		6 years		4,632		3,851		6 years
Patents and other intangibles		72,815		43,866		8 years		61,646		36,452		8 years

Total	$	701,100	$	472,705		7 years	$	597,975	$	390,920		7 years

The gross carrying value of intangible assets and accumulated amortization for intangible assets increased by $58 million and $38 million, respectively, in the year ended December 31, 2017 due to the effects of foreign currency translation. Amortization expense for intangible assets was $45 million for each of the years ended December 31, 2017, 2016 and 2015. Amortization expense for intangible assets is estimated to be $46 million per year for each of the next five years.

8 Debt

In November 2017, the Company entered into a new credit agreement (the “2017 Credit Agreement”) that provides for a $1.5 billion revolving facility and a $300 million term loan. The revolving facility and term loan both mature on November 30, 2022 and require no scheduled prepayments before that date. The Company used $1.3 billion of the proceeds from the 2017 Credit Agreement to repay the outstanding amounts under the Company’s existing multi-borrower credit agreement dated June 2013 (the “2013 Credit Agreement”), which was terminated early without penalty. The Company plans to use future proceeds from the revolving facility for general corporate purposes.

The interest rates applicable to the 2017 Credit Agreement are, at the Company’s option, equal to either the alternate base rate (which is a rate per annum equal to the greatest of (a) the prime rate in effect on such day, (b) the Federal Reserve Bank of New York Rate on such day plus 1/2 of 1% per annum and (c) the adjusted LIBO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

rate on such day (or if such day is not a business day, the immediately preceding business day) for a deposit in U.S. dollars with a maturity of one month plus 1% per annum) or the applicable 1, 2, 3 or 6 month adjusted LIBO rate or EURIBO rate for Euro-denominated loans, in each case, plus an interest rate margin based upon the Company’s leverage ratio, which can range between 0 and 12.5 basis points for alternate base rate loans and between 80 and 112.5 basis points for LIBO rate or EURIBO rate loans. The facility fee on the 2017 Credit Agreement ranges between 7.5 and 25 basis points per annum, based on the leverage ratio, of the amount of the revolving facility commitments and the outstanding term loan. The 2017 Credit Agreement requires that the Company comply with an interest coverage ratio test of not less than 3.50:1 as of the end of any fiscal quarter for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, the 2017 Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.

As of both December 31, 2017 and 2016, the Company had a total of $700 million of outstanding senior unsecured notes. Interest on the fixed rate senior unsecured notes is payable semi-annually each year. Interest on the floating rate senior unsecured notes is payable quarterly. The Company may prepay all or some of the senior unsecured notes at any time in an amount not less than 10% of the aggregate principal amount outstanding, plus the applicable make-whole amount or prepayment premium for Series H and J senior unsecured notes. In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than 3.50:1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.

The Company had the following outstanding debt at December 31, 2017 and 2016 (in thousands):


	December 31,
	2017			2016
Foreign subsidiary lines of credit	$	273		$	297
Senior unsecured notes - Series D - 3.22%, due March 2018		100,000			—
Credit agreement		—			125,000

Total notes payable and debt, current		100,273			125,297

Senior unsecured notes - Series B - 5.00%, due February 2020		100,000			100,000
Senior unsecured notes - Series D - 3.22%, due March 2018		—			100,000
Senior unsecured notes - Series E - 3.97%, due March 2021		50,000			50,000
Senior unsecured notes - Series F - 3.40%, due June 2021		100,000			100,000
Senior unsecured notes - Series G - 3.92%, due June 2024		50,000			50,000
Senior unsecured notes - Series H - floating rate*, due June 2024		50,000			50,000
Senior unsecured notes - Series I - 3.13%, due May 2023		50,000			50,000
Senior unsecured notes - Series J - floating rate**, due May 2024		40,000			40,000
Senior unsecured notes - Series K - 3.44%, due May 2026		160,000			160,000
Credit agreement		1,300,000			1,005,000
Unamortized debt issuance costs		(2,499	)		(3,034	)

Total long-term debt		1,897,501			1,701,966

Total debt	$	1,997,774		$	1,827,263

*	Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus 1.25%.

**	Series J senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus 1.45%.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2017 and 2016, the Company had a total amount available to borrow under existing credit agreements of $498 million and $468 million, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 2.98% and 2.55% at December 31, 2017 and 2016, respectively. As of December 31, 2017, the Company was in compliance with all debt covenants.

The Company and its foreign subsidiaries also had available short-term lines of credit totaling $91 million and $79 million at December 31, 2017 and 2016, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. At December 31, 2017 and 2016, the weighted-average interest rates applicable to these short-term borrowings were 1.48% and 1.49%, respectively.

Annual maturities of debt outstanding at December 31, 2017 are as follows (in thousands):


	Total
2018	$	100,273
2019		—
2020		100,000
2021		150,000
2022		1,300,000
Thereafter		350,000

Total	$	2,000,273

9 Income Taxes

Income tax data for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):


	Year Ended December 31,
	2017		2016		2015
The components of income from operations before income taxes are as follows:
Domestic	$	55,751	$	35,154	$	66,716
Foreign		585,346		564,960		475,203

Total	$	641,097	$	600,114	$	541,919


	Year Ended December 31,
	2017		2016		2015
The current and deferred components of the provision for income taxes on operations are as follows:
Current	$	575,276	$	77,407	$	66,285
Deferred		45,510		1,204		6,581

Total	$	620,786	$	78,611	$	72,866

The jurisdictional components of the provision for income taxes on operations are as follows:
Federal	$	535,777	$	19,693	$	20,882
State		26,561		3,090		3,389
Foreign		58,448		55,828		48,595

Total	$	620,786	$	78,611	$	72,866

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The U.S. enacted the Tax Cuts and Jobs Act (the “2017 Tax Act”) on December 22, 2017 (“Enactment Date”).

The 2017 Tax Act contains several key provisions including, but not limited to the following:

	•		A one-time tax on the mandatory deemed repatriation of pre-2018 foreign earnings and profits (“E&P”), referred to as the toll charge;

	•		Reduction in the Corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017;

	•		Introduction of a new U.S. tax on certain off-shore earnings referred to as Global Intangible Low-Taxed Income (“GILTI”) at an effective tax rate of 10.5% for tax years beginning after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset by foreign tax credits; and

	•		Introduction of a territorial tax system beginning in 2018 by providing a 100% dividends received deduction on certain qualified dividends from foreign subsidiaries.

During the fourth quarter of 2017, we recorded an incremental income tax provision of $550 million, which is comprised of the following:

	•		An estimated income tax provision of $490 million for the one-time deemed repatriation of pre-2018 E&P. In accordance with the 2017 Tax Act, the toll charge liability may be paid over eight years. As such, we have recorded $450 million and $40 million in long-term income tax liabilities and accrued income taxes (current), respectively, as of December 31, 2017;

	•		An estimated net income tax provision of $20 million, for the remeasurement of our deferred tax assets and liabilities at the newly enacted tax rate of 21%; and

	•		As a result of the 2017 Tax Act and the Company’s expectations about distributing certain cash balances from its foreign subsidiaries to the U.S., the Company also recorded estimated income tax provisions for estimated state income taxes and foreign withholding taxes of $40 million.

The $550 million income tax provision recorded was based on currently available information and interpretations of applying the provisions of the 2017 Tax Act as of the time of filing this Annual Report on Form 10-K. In accordance with authoritative guidance issued by the Securities and Exchange Commission (“SEC”), the income tax effect of the 2017 Tax Act represent provisional amounts for which our accounting is incomplete but for which reasonable estimates were determined and recorded during the fourth quarter of 2017. The guidance provides for a measurement period, up to one year from the Enactment Date, in which provisional amounts may be adjusted when additional information is obtained, prepared and analyzed. Adjustments to provisional amounts identified during the measurement period should be recorded as an income tax provision or benefit in the period the adjustment is determined.

We continue to evaluate the impacts of the 2017 Tax Act and consider the amounts recorded to be provisional. In addition, we are still evaluating the GILTI provisions of the 2017 Tax Act and its impact, if any, on our consolidated financial statements as of December 31, 2017. Companies are allowed to adopt an accounting policy to either recognize deferred taxes for GILTI or treat such as a tax cost in the year incurred. We have not yet determined our accounting policy because determining the impact of the GILTI provisions requires additional analysis. As such, we did not record a deferred income tax expense or benefit related to the GILTI provisions in our consolidated statement of operations for the year ended December 31, 2017 and we will finalize this analysis and determination during the measurement period.

The Company recorded a provisional amount for its toll charge, which represents its reasonable estimate of the liability due for the mandatory deemed repatriation of its foreign E&P. Determining the provisional toll

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

charge liability required a significant effort based on a number of estimates and factors that need to be further analyzed and finalized including, but not limited to, the following:

	•		Analyzing our accumulated foreign E&P and related foreign tax pools, including historical practices and assertions made in determining such; and

	•		Determining the composition, including intercompany receivables and payables of specified foreign corporations, of our foreign E&P that is held in cash or liquid assets and other assets at several measurement dates, as a different tax rate is applied to each when determining the toll charge liability.

For the aforementioned factors as well as the proximity of the enactment of the 2017 Tax Act to our year-end, we had limited time to analyze the 2017 Tax Act and its various interpretations including any additional guidance issued through the time of filing this Annual Report on Form 10-K, to assess how to apply the new law to our specific facts and circumstances and determine the toll charge that we expect to include in our 2017 tax return. We made certain assumptions and estimates in determining the provisional toll charge that may result in adjustments when we finalize our analysis and accounting for the 2017 Tax Act.

Certain income tax effects of the 2017 Tax Act represent provisional amounts for which our analysis is incomplete but for which reasonable estimates were determined and recorded during the fourth quarter of 2017. Our actual results may materially differ from our current estimates due to, among other things, further guidance that may be issued by U.S. federal or state tax authorities to interpret the 2017 Tax Act, or guidance from the SEC or FASB regarding income tax accounting matters related to the 2017 Tax Act. We will continue to analyze the 2017 Tax Act and any additional guidance that may be issued so we can finalize the tax effects of the 2017 Tax Act on our financial statements in the measurement period.

At December 31, 2017, as a result of the 2017 Tax Act deemed repatriation and plans to distribute certain cash balances from its foreign subsidiaries to the U.S., we have recorded state and foreign withholding taxes on the unremitted earnings of our foreign subsidiaries. The Company continues to be indefinitely reinvested in relation to the cumulative historical outside basis difference not related to the unremitted earnings that were taxed. We will continue to evaluate our assertions, including intentions and plans, on the cumulative historical outside basis differences, not related to the unremitted earnings that were taxed, in our foreign subsidiaries as of December 31, 2017. We expect to finalize our analysis and accounting related to the toll charge, deferred tax assets and liabilities and any remaining outside basis differences in our foreign subsidiaries during the measurement period. The determination of the unrecognized deferred tax liability on cumulative historical outside basis differences that are not related to the unremitted earnings that were taxed is not practicable.


	Year Ended December 31,
	2017			2016			2015
The differences between income taxes computed at the United States statutory rate and the provision for income taxes are summarized as follows:
Federal tax computed at U.S. statutory income tax rate	$	224,384		$	210,040		$	189,672
2017 Tax Act		550,000			—			—
Settlement of tax audits		706			345			(3,258	)
State income tax, net of federal income tax benefit		1,289			2,008			2,601
Net effect of foreign operations		(134,117	)		(133,518	)		(112,426	)
Effect of stock-based compensation		(19,566	)		—			—
Other, net		(1,910	)		(264	)		(3,723	)

Provision for income taxes	$	620,786		$	78,611		$	72,866

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the marginal effective tax rates were approximately 37.5%, 12.5%, 19.25% and 0%, respectively, as of December 31, 2017. 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 current statutory tax rate in Singapore is 17%. 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 in 2017, 2016 and 2015 by $25 million, $23 million and $20 million, respectively and increased the Company’s net income per diluted share by $0.31, $0.29 and $0.25, respectively.

The Company’s effective tax rates for the years ended December 31, 2017, 2016 and 2015 were 96.8%, 13.1% and 13.4%, respectively. The provision for income taxes for 2017 includes a $550 million estimate for the impact of the 2017 Tax Act. In addition, the effective tax rate in 2017 includes the adoption of new accounting guidance related to stock-based compensation, which decreased income tax expense by $20 million and decreased the Company’s effective tax rate by 3.1 percentage points. See Note 2 for further information regarding the adoption of this standard.

The income tax provision for 2016 included a $3 million tax benefit related to a release of a valuation allowance on certain net operating loss carryforwards. In 2015, the income tax provision included a $3 million tax benefit related to the completion of tax audit examinations. The remaining differences between 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 tax effects of temporary differences and carryforwards which give rise to deferred tax assets and deferred tax liabilities are summarized as follows (in thousands):


	December 31,
	2017			2016
Deferred tax assets:
Net operating losses and credits	$	75,630		$	76,027
Depreciation		5,952			8,310
Stock-based compensation		9,815			19,609
Deferred compensation		21,434			24,813
Revaluation of equity investments and licenses		3,465			4,707
Inventory		4,864			5,235
Accrued liabilities and reserves		8,230			8,814
Other		11,873			15,948

Total deferred tax assets		141,263			163,463
Valuation allowance		(62,098	)		(61,225	)

Deferred tax assets, net of valuation allowance		79,165			102,238
Deferred tax liabilities:
Capitalized software		(19,630	)		(15,323	)
Amortization		(3,394	)		(5,115	)
Indefinite-lived intangibles		(13,254	)		(19,680	)
Deferred tax liability on foreign earnings		(21,000	)		—

Total deferred tax liabilities		(57,278	)		(40,118	)

Net deferred tax assets	$	21,887		$	62,120

As of December 31, 2017, the Company has provided a deferred tax valuation allowance of $62 million, of which $59 million relates to certain foreign net operating losses. The Company’s net deferred tax assets

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

associated with net operating losses and tax credit carryforwards are approximately $17 million as of December 31, 2017, which represent the future tax benefit of foreign net operating loss carryforwards that do not expire under current law.

As a result of the adoption of new accounting guidance related to stock-based compensation, the Company no longer records excess tax benefits related to stock-based compensation in equity. The income tax benefits associated with equity compensation expense recognized for tax purposes and credited to additional paid-in capital were $14 million and $13 million for the years ended December 31, 2016 and 2015, respectively.

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 unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 (in thousands):


	2017			2016			2015
Balance at the beginning of the period	$	9,964		$	14,450		$	19,596
Changes resulting from completion of tax examinations		—			(828	)		(2,405	)
Other changes in uncertain tax benefits		(4,121	)		(3,658	)		(2,741	)

Balance at the end of the period	$	5,843		$	9,964		$	14,450

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, 2012. However, carryforward tax attributes that were generated in years beginning on or before January 1, 2013 may still be adjusted upon examination by tax authorities if the attributes are utilized. The Company continuously monitors the lapsing of statutes of limitations on potential tax assessments for related changes in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred tax assets and liabilities.

During the year ended December 31, 2016, the Company concluded tax audit disputes outside the U.S. that, in part, related to matters for which the Company had recorded net uncertain tax benefits. The resolution of these tax disputes resulted in a $1 million reduction in the measurement of its unrecognized tax benefits for the year ended December 31, 2016.

During the year ended December 31, 2015, the Company concluded U.S. tax audit disputes that, in part, related to matters for which the Company had recorded net uncertain tax benefits. The resolution of these tax disputes resulted in a $2 million reduction in the measurement of its unrecognized tax benefits and a $2 million decrease in its provision for income taxes for the year ended December 31, 2015.

As of December 31, 2017, the Company expects to record additional reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of approximately $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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10 Litigation

From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of business. The Company believes it has meritorious arguments in its current litigation matters and believes any outcome, either individually or in the aggregate, will not be material to the Company’s financial position, results of operations or cash flows. During 2017, 2016 and 2015, the Company recorded $11 million, $4 million and $4 million of litigation settlement provisions and related costs, respectively. The accrued patent litigation expense is in other current liabilities in the consolidated balance sheets at December 31, 2017 and 2016.

11 Other Commitments and Contingencies

Lease agreements, expiring at various dates through 2031, cover buildings, office equipment and automobiles. Rental expense was $27 million, $28 million and $27 million for the years ended December 31, 2017, 2016 and 2015, respectively. Future minimum rents payable as of December 31, 2017 under non-cancelable leases with initial terms exceeding one year are as follows (in thousands):


2018	$	23,168
2019		18,228
2020		14,122
2021		8,652
2022 and thereafter		25,512

Total	$	89,682

The Company licenses certain technology and software from third parties. Future minimum license fees payable under existing license agreements as of December 31, 2017 are immaterial for the years ended December 31, 2018 and thereafter. The Company enters into licensing arrangements with third parties that require future milestone or royalty payments contingent upon future events. Upon the achievement of certain milestones in existing agreements, the Company could make additional future payments of up to $7 million, as well as royalties on future net sales.

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.

12 Stock-Based Compensation

In May 2012, the Company’s shareholders approved the Company’s 2012 Equity Incentive Plan (“2012 Plan”). As of December 31, 2017, the 2012 Plan has 2.7 million shares available for grant in the form of incentive or non-qualified stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units, performance stock units or other types of awards. The Company issues new shares of common stock upon exercise of stock options, restricted stock unit conversion or performance stock unit conversion. Under the 2012 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 2012 Plan is scheduled to terminate on May 9, 2022. 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Compensation Committee of the Board of Directors and generally vest in equal annual installments over a five-year period. A SAR may be granted alone or in conjunction with an option or other award. Shares of restricted stock, and restricted stock units and performance stock units may be issued under the 2012 Plan for such consideration as is determined by the Compensation Committee of the Board of Directors. As of December 31, 2017, the Company had stock options, restricted stock and restricted and performance stock unit awards outstanding.

In May 2009, the Company’s shareholders approved the 2009 Employee Stock Purchase Plan under which eligible employees may contribute up to 15% of their earnings toward the quarterly purchase of the Company’s common stock. The plan makes available 0.9 million shares of the Company’s common stock, which includes the remaining shares available under the 1996 Employee Stock Purchase Plan. As of December 31, 2017, 1.4 million shares have been issued under both the 2009 and 1996 Employee Stock Purchase Plans. Each plan period lasts three months beginning on January 1, April 1, July 1 and October 1 of each year. The purchase price for each share of stock is the lesser of 90% of the market price on the first day of the plan period or 100% of the market price on the last day of the plan period. Stock-based compensation expense related to this plan was $1 million for each of the years ended December 31, 2017, 2016 and 2015, respectively.

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. The new stock-based compensation accounting guidance offers the option of recognizing forfeitures as they occur or estimating forfeitures at the time of grant and, if necessary, revising in subsequent periods if actual forfeitures differ from those estimates. The Company has elected to remain consistent with prior periods and estimate forfeitures at the time of grant and, if necessary, revise in subsequent periods in which actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted. In addition, if the Company employs different assumptions in the application of these standards, the compensation expense that the Company records in the future periods may differ significantly from what the Company has recorded in the current period.

The consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015 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):


	2017		2016		2015
Cost of sales	$	3,032	$	2,738	$	2,590
Selling and administrative expenses		33,335		34,451		26,431
Research and development expenses		3,069		3,809		4,347

Total stock-based compensation	$	39,436	$	40,998	$	33,368

During the years ended December 31, 2017 and 2016, the Company recognized $4 million and $7 million, respectively, of stock compensation expense related to the modification of certain stock awards upon the retirement of senior executives.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

was estimated on the date of grant using the Black-Scholes option pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience for the population of non-qualified stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during 2017, 2016 and 2015 are as follows:


Options Issued and Significant Assumptions Used to Estimate Option Fair Values	2017			2016			2015
Options issued in thousands		389			324			673
Risk-free interest rate		2.2	%		1.9	%		1.8	%
Expected life in years		6			6			6
Expected volatility		0.227			0.247			0.257
Expected dividends		—			—			—

Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant	2017			2016			2015
Exercise price	$	170.24		$	135.02		$	127.63
Fair value	$	45.73		$	37.44		$	35.84

The following table summarizes stock option activity for the plans for the year ended December 31, 2017 (in thousands, except per share data):


	Number of Shares			Exercise Price per Share		Weighted- Average Exercise Price
Outstanding at December 31, 2016		2,697		$	38.09 to $139.51	$	106.55
Granted		389		$	136.43 to $194.26	$	170.24
Exercised		(972	)	$	41.20 to $139.51	$	93.49
Canceled		(75	)	$	87.06 to $139.51	$	120.59

Outstanding at December 31, 2017		2,039		$	38.09 to $194.26	$	124.41

The following table details the options outstanding at December 31, 2017 by range of exercise prices (in thousands, except per share data):


Exercise Price Range	Number of Shares Outstanding		Weighted- Average Exercise Price		Remaining Contractual Life of Options Outstanding		Number of Shares Exercisable		Weighted- Average Exercise Price
$38.09 to $79.99		157	$	67.58		2.7		157	$	67.58
$80.00 to $113.36		642	$	103.01		6.2		391	$	98.74
$113.37 to $194.26		1,240	$	142.69		8.6		307	$	128.26

Total		2,039	$	124.41		7.4		855	$	103.63

During 2017, 2016 and 2015, the total intrinsic value of the stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $76 million, $53 million and $48 million, respectively. The total cash received from the exercise of these stock options was $91 million, $56 million and $47 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The aggregate intrinsic value of the outstanding stock options at December 31, 2017 was $140 million. Options exercisable at December 31, 2017, 2016 and 2015 were 0.9 million, 1.3 million and 1.5 million,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

respectively. The weighted-average exercise prices of options exercisable at December 31, 2017, 2016 and 2015 were $103.63, $92.26 and $80.71, respectively. The weighted-average remaining contractual life of the exercisable outstanding stock options at December 31, 2017 was 5.6 years.

At December 31, 2017, the Company had 2 million stock options that are vested and expected to vest. The intrinsic value, weighted-average exercise price and remaining contractual life of the vested and expected to vest stock options were $137 million, $124.18 and 7.2 years, respectively, at December 31, 2017.

As of December 31, 2017, there were $42 million of total unrecognized compensation costs related to unvested stock option awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 3.5 years.

Restricted Stock

During the years ended December 31, 2017, 2016 and 2015, the Company granted 8 thousand, 8 thousand and 10 thousand shares of restricted stock, respectively. The weighted-average fair value per share on the grant date of the restricted stock granted in 2017, 2016 and 2015 was $140.10, $130.35 and $113.88, respectively. The Company has recorded $1 million of compensation expense in each of the years ended December 31, 2017, 2016 and 2015 related to the restricted stock grants. As of December 31, 2017, the Company had 6 thousand unvested shares of restricted stock outstanding, which have been fully expensed.

Restricted Stock Units

The following table summarizes the unvested restricted stock unit award activity for the year ended December 31, 2017 (in thousands, except for per share amounts):


	Shares			Weighted-Average Fair Value
Unvested at December 31, 2016		453		$	110.34
Granted		107		$	154.60
Vested		(164	)	$	105.02
Forfeited		(22	)	$	119.27

Unvested at December 31, 2017		374		$	124.81

Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period. The amount of compensation costs recognized for the years ended December 31, 2017, 2016 and 2015 on the restricted stock units expected to vest were $17 million, $17 million and $16 million, respectively. As of December 31, 2017, there were $32 million of total unrecognized compensation costs related to the restricted stock unit awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 3.0 years.

Performance Stock Units

During year ended December 31, 2017, the Company issued performance stock units, which are equity compensation awards with a market vesting condition based on the Company’s Total Shareholder Return (“TSR”) relative to the TSR of the components of the S&P Health Care Index. TSR is the change in value of a stock price over time, including the reinvestment of dividends. The vesting schedule ranges from 0% to 200% of the target shares awarded.

In determining the fair value of the performance stock units, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected terms. The fair value of each

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 2017 are as follows:


Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values	2017
Performance stock units issued in thousands		40
Risk-free interest rate		1.6	%
Expected life in years		3.0
Expected volatility		0.209
Average volatility of peer companies		0.256
Correlation Coefficient		0.378
Expected dividends		—

The following table summarizes the unvested performance stock unit award activity for the year ended December 31, 2017 (in thousands, except for per share amounts):


	Shares			Weighted-Average Fair Value
Unvested at December 31, 2016		27		$	171.16
Granted		40		$	210.25
Forfeited		(3	)	$	156.25

Unvested at December 31, 2017		64		$	196.29

The amount of compensation costs recognized for the years ended December 31, 2017 and 2016 on the performance stock units expected to vest were $2 million and less than $1 million, respectively. As of December 31, 2017, there were $10 million of total unrecognized compensation costs related to the restricted stock unit awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 2.5 years.

13 Earnings Per Share

Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):


	Year Ended December 31, 2017
	Net Income		Weighted-Average Shares		Per Share
	(Numerator)		(Denominator)		Amount
Net income per basic common share	$	20,311		79,793	$	0.25
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		811		—

Net income per diluted common share	$	20,311		80,604	$	0.25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Year Ended December 31, 2016
	Net Income		Weighted-Average Shares		Per Share
	(Numerator)		(Denominator)		Amount
Net income per basic common share	$	521,503		80,786	$	6.46
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		631		(0.05	)

Net income per diluted common share	$	521,503		81,417	$	6.41


	Year Ended December 31, 2015
	Net Income		Weighted-Average Shares		Per Share
	(Numerator)		(Denominator)		Amount
Net income per basic common share	$	469,053		82,336	$	5.70
Effect of dilutive stock option, restricted stock and restricted stock unit securities		—		751		(0.05	)

Net income per diluted common share	$	469,053		83,087	$	5.65

For the years ended December 31, 2017, 2016 and 2015, the Company had 0.4 million, 0.9 million and 1.2 million stock options that were antidilutive, respectively, due to having higher exercise prices than the Company’s average stock price during the period. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.

14 Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income are detailed as follows (in thousands):


	Currency Translation			Unrealized Gain (Loss) on Retirement Plans			Unrealized Gain (Loss) on Investments			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2016	$	(170,566	)	$	(43,894	)	$	(1,820	)	$	(216,280	)
Other comprehensive income (loss), net of tax		101,148			6,791			(1,726	)		106,213

Balance at December 31, 2017	$	(69,418	)	$	(37,103	)	$	(3,546	)	$	(110,067	)

15 Retirement Plans

U.S. employees are eligible to participate in the Waters Employee Investment Plan, a 401(k) defined contribution plan, immediately upon hire. Employees may contribute up to 60% of eligible pay on a pre-tax or post-tax basis and the Company makes matching contributions of 100% for contributions up to 6% of eligible pay. The Company also sponsors a 401(k) Restoration Plan, which is a nonqualified defined contribution plan. Employees are 100% vested in employee and Company matching contributions for both plans. For the years ended December 31, 2017, 2016 and 2015, the Company’s matching contributions amounted to $16 million, $15 million and $14 million, respectively.

The Company maintains two defined benefit plans in the U.S. for which the pay credit accruals have been frozen, the Waters Retirement Plan and the Waters Retirement Restoration Plan (collectively, the “U.S. Pension Plans”). The Company also sponsors other employee benefit plans in the U.S., including a retiree healthcare plan, which provides reimbursement for medical expenses and is contributory. There are various employee benefit

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

plans outside the United States (both defined benefit and defined contribution plans). Certain non-U.S. defined benefit plans (“Non-U.S. Pension Plans”) are included in the disclosures below, which are required under the accounting standards for retirement benefits.

The Company contributed $12 million, $12 million and $11 million in the years ended December 31, 2017, 2016 and 2015, respectively, to the non-U.S. plans (primarily defined contribution plans) which are currently outside of the scope of the required disclosures. The eligibility and vesting of non-U.S. plans are consistent with local laws and regulations.

The net periodic pension cost is made up of several components that reflect different aspects of the Company’s financial arrangements as well as the cost of benefits earned by employees. These components are determined using the projected unit credit actuarial cost method and are based on certain actuarial assumptions. The Company’s accounting policy is to reflect in the projected benefit obligation all benefit changes to which the Company is committed as of the current valuation date; use a market-related value of assets to determine pension expense; amortize increases in prior service costs on a straight-line basis over the expected future service of active participants as of the date such costs are first recognized; and amortize cumulative actuarial gains and losses in excess of 10% of the larger of the market-related value of plan assets and the projected benefit obligation over the expected future service of active participants.

Summary data for the U.S. Pension Plans, U.S. Retiree Healthcare Plan and Non-U.S. Pension Plans are presented in the following tables, using the measurement dates of December 31, 2017 and 2016, respectively.

The reconciliation of the projected benefit obligations for the plans at December 31, 2017 and 2016 is as follows (in thousands):


	2017									2016
	U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Projected benefit obligation, January 1	$	159,416		$	14,921		$	85,311		$	155,003		$	12,963		$	75,677
Service cost		450			546			5,082			377			473			4,954
Employee contributions		—			1,041			605			—			987			584
Interest cost		6,829			618			1,518			6,931			557			1,699
Actuarial losses (gains)		8,658			942			(2,590	)		2,338			586			6,510
Benefits paid		(5,058	)		(947	)		(2,078	)		(5,233	)		(645	)		(2,141	)
Plan amendments		—			—			636			—			—			—
Plan settlements		(2,231	)		—			(1,229	)		—			—			—
Other plans		—			—			196			—			—			1,305
Currency impact		—			—			8,927			—			—			(3,277	)

Projected benefit obligation, December 31	$	168,064		$	17,121		$	96,378		$	159,416		$	14,921		$	85,311

The accumulated benefit obligations for the plans at December 31, 2017 and 2016 are as follows (in thousands):


	2017							2016
	U.S. Pension Plans		U.S. Healthcare Plan			Non-U.S. Pension Plans		U.S. Pension Plans		U.S. Healthcare Plan			Non-U.S. Pension Plans
Accumulated benefit obligation	$	168,064		*	*	$	82,615	$	159,416		*	*	$	72,618

**	Not applicable.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The reconciliation of the fair value of the plan assets at December 31, 2017 and 2016 is as follows (in thousands):


	2017									2016
	U.S. Pension Plans			U.S. Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Healthcare Plan			Non-U.S. Pension Plans
Fair value of plan assets, January 1	$	144,665		$	9,142		$	65,548		$	136,128		$	8,001		$	60,441
Actual return on plan assets		27,729			1,542			390			8,621			510			4,741
Company contributions		6,162			347			4,733			5,149			289			4,579
Employee contributions		—			1,041			605			—			987			584
Plan settlements		(2,125	)		—			(915	)		—			—			—
Benefits paid		(5,058	)		(947	)		(2,078	)		(5,233	)		(645	)		(2,141	)
Other plans		—			—			(213	)		—			—			262
Currency impact		—			—			6,920			—			—			(2,918	)

Fair value of plan assets, December 31	$	171,373		$	11,125		$	74,990		$	144,665		$	9,142		$	65,548

The summary of the funded status for the plans at December 31, 2017 and 2016 is as follows (in thousands):


	2017									2016
	U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Projected benefit obligation	$	(168,064	)	$	(17,121	)	$	(96,378	)	$	(159,416	)	$	(14,921	)	$	(85,311	)
Fair value of plan assets		171,373			11,125			74,990			144,665			9,142			65,548

Funded status	$	3,309		$	(5,996	)	$	(21,388	)	$	(14,751	)	$	(5,779	)	$	(19,763	)

The summary of the amounts recognized in the consolidated balance sheets for the plans at December 31, 2017 and 2016 is as follows (in thousands):


	2017									2016
	U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Long-term assets	$	4,562		$	—		$	1,245		$	—		$	—		$	1,084
Current liabilities		(76	)		(347	)		—			(1,343	)		(289	)		—
Long-term liabilities		(1,177	)		(5,649	)		(22,633	)		(13,408	)		(5,490	)		(20,847	)

Net amount recognized at December 31	$	3,309		$	(5,996	)	$	(21,388	)	$	(14,751	)	$	(5,779	)	$	(19,763	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The summary of the components of net periodic pension costs for the plans for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):


	2017									2016									2015
	U.S. Pension Plans			U.S. Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Healthcare Plan			Non-U.S. Pension Plans
Service cost	$	450		$	546		$	5,082		$	377		$	473		$	4,954		$	—		$	577		$	5,087
Interest cost		6,829			618			1,518			6,931			557			1,699			6,128			470			1,503
Expected return on plan assets		(10,298	)		(587	)		(1,688	)		(9,635	)		(519	)		(1,596	)		(9,145	)		(497	)		(1,542	)
Settlement loss		155			—			232			—			—			—			—			—			95
Net amortization:
Prior service (credit) cost		—			—			(168	)		—			—			(192	)		—			—			39
Net actuarial loss		2,770			—			959			2,702			—			753			3,278			—			1,031

Net periodic pension (benefit) cost	$	(94	)	$	577		$	5,935		$	375		$	511		$	5,618		$	261		$	550		$	6,213

The summary of the changes in amounts recognized in other comprehensive income (loss) for the plans for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):


	2017							2016									2015
	U.S. Pension Plans		U.S. Healthcare Plan		Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Healthcare Plan		Non-U.S. Pension Plans
Prior service credit (cost)	$	—	$	—	$	(636	)	$	—		$	—		$	—		$	—		$	—	$	645
Net gain (loss) arising during the year		8,879		13		1,609			(3,352	)		(594	)		(3,361	)		(6,365	)		1,126		3,025
Amortization:
Prior service (credit) cost		—		—		(168	)		—			—			(192	)		—			—		39
Net loss		2,925		—		1,191			2,702			—			753			3,278			—		1,126
Other Plans		—		—		—			—			—			(360	)		—			—		—
Currency impact		—		—		(2,033	)		—			—			884			—			—		1,760

Total recognized in other comprehensive income (loss)	$	11,804	$	13	$	(37	)	$	(650	)	$	(594	)	$	(2,276	)	$	(3,087	)	$	1,126	$	6,595

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The summary of the amounts included in accumulated other comprehensive loss in stockholders’ equity for the plans at December 31, 2017 and 2016 is as follows (in thousands):


	2017								2016
	U.S. Pension Plans			U.S. Retiree Healthcare Plan		Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Retiree Healthcare Plan		Non-U.S. Pension Plans
Net actuarial (loss) gain	$	(37,682	)	$	588	$	(18,857	)	$	(49,486	)	$	575	$	(19,638	)
Prior service credit		—			—		530			—			—		1,348

Total	$	(37,682	)	$	588	$	(18,327	)	$	(49,486	)	$	575	$	(18,290	)

The summary of the amounts included in accumulated other comprehensive loss expected to be included in next year’s net periodic benefit cost for the plans at December 31, 2017 is as follows (in thousands):


	2017
	U.S. Pension Plans			U.S. Retiree Healthcare Plan		Non-U.S. Pension Plans
Net actuarial loss	$	(3,075	)	$	—	$	(685	)
Prior service credit		—			—		119

Total	$	(3,075	)	$	—	$	(566	)

The plans’ investment asset mix is as follows at December 31, 2017 and 2016:


	2017									2016
	U.S.			U.S.			Non-U.S.			U.S.			U.S.			Non-U.S.
	Pension			Healthcare			Pension			Pension			Healthcare			Pension
	Plans			Plan			Plans			Plans			Plan			Plans
Equity securities		77	%		65	%		7	%		74	%		58	%		7	%
Debt securities		23	%		35	%		16	%		25	%		42	%		18	%
Cash and cash equivalents		0	%		0	%		8	%		1	%		0	%		6	%
Insurance contracts and other		0	%		0	%		69	%		0	%		0	%		69	%

Total		100	%		100	%		100	%		100	%		100	%		100	%

The plans’ investment policies include the following asset allocation guidelines:


	U.S. Pension and U.S. Retiree					Non-U.S. Pension Plans Policy Target
	Healthcare Plans
	Policy Target			Range
Equity securities		70	%		50% - 90%		5	%
Debt securities		25	%		20% - 60%		20	%
Cash and cash equivalents		5	%		0% - 20%		10	%
Insurance contracts and other		0	%		0% - 20%		65	%

The asset allocation policy for the U.S. Pension Plans and U.S. Retiree Healthcare Plan was developed in consideration of the following long-term investment objectives: achieving a return on assets consistent with the investment policy, achieving portfolio returns which exceed the average return for similarly invested funds and maximizing portfolio returns with at least a return of 2.5% above the one-year constant maturity Treasury bond yield over reasonable measurement periods and based on reasonable market cycles.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Within the equity portfolio of the U.S. retirement plans, investments are diversified among market capitalization and investment strategy. The Company targets a 30% allocation of its U.S. retirement plans’ equity portfolio to be invested in financial markets outside of the United States. The Company does not invest in its own stock within the U.S. retirement plans’ assets.

Plan assets are measured at fair value using the following valuation techniques and inputs:


Level 1:		The fair value of these types of investments is based on market and observable sources from daily quoted prices on nationally recognized securities exchanges.

Level 2:		The fair value of the money market funds held with financial institutions is based on the net asset value of the underlying treasury bill and commercial paper, which are valued using third-party pricing services that utilize inputs such as benchmark yields, credit spreads and broker/dealer quotes to determine the value.

Level 3:		These bank and insurance investment contracts are issued by well-known, highly-rated companies. The fair value disclosed represents the present value of future cash flows under the terms of the respective contracts. Significant assumptions used to determine the fair value of these contracts include the amount and timing of future cash flows and counterparty credit risk.

There have been no changes in the above valuation techniques associated with determining the value of the plans’ assets during the years ended December 31, 2017 and 2016.

Investments valued at NAV consist of hedge funds in the U.S Pension Plans, which are valued based on underlying investments in equity securities of U.S. companies where the hedge fund manager is targeting a particular net long or net short position on the underlying stock. The fair value of these funds is initially based on market and observable sources from daily quoted prices on nationally recognized securities exchanges and then adjustments are made to the net asset value of the hedge fund to account for the effects of any liquidation or redemption restrictions. The redemption terms for the hedge funds are generally quarterly with a 90 day notification period and there are no redemption restrictions.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair value of the Company’s retirement plan assets are as follows at December 31, 2017 (in thousands):


	Total at December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Pension Plans:
Mutual funds(a)	$	163,438	$	163,438	$	—	$	—

Total U.S. Pension Plans		163,438		163,438		—		—
U.S. Retiree Healthcare Plan:
Mutual funds(b)		11,125		11,125		—		—

Total U.S. Retiree Healthcare Plan		11,125		11,125		—		—
Non-U.S. Pension Plans:
Cash equivalents(c)		5,783		5,783		—		—
Mutual funds(d)		17,244		17,244		—		—
Bank and insurance investment contracts(e)		51,963		—		—		51,963

Total Non-U.S. Pension Plans		74,990		23,027		—		51,963

Total fair value of retirement plan assets		249,553	$	197,590	$	—	$	51,963

Investments valued at NAV		7,935

Total retirement plan assets	$	257,488

The fair value of the Company’s retirement plan assets are as follows at December 31, 2016 (in thousands):


	Total at December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Pension Plans:
Mutual funds(f)	$	136,548	$	136,548	$	—	$	—
Cash equivalents(g)		728		—		728		—

Total U.S. Pension Plans		137,276		136,548		728		—
U.S. Retiree Healthcare Plan:
Mutual funds(h)		9,142		9,142		—		—

Total U.S. Retiree Healthcare Plan		9,142		9,142		—		—
Non-U.S. Pension Plans:
Cash equivalents(c)		3,718		3,718		—		—
Mutual funds(i)		16,737		16,737		—		—
Bank and insurance investment contracts(e)		45,093		—		—		45,093

Total Non-U.S. Pension Plans		65,548		20,455		—		45,093

Total fair value of retirement plan assets		211,966	$	166,145	$	728	$	45,093

Investments valued at NAV		7,389

Total retirement plan assets	$	219,355

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(a)	The mutual fund balance in the U.S. Pension Plans are invested in the following categories: 45% in the common stock of large-cap U.S. companies, 30% in the common stock of international growth companies and 25% in fixed income bonds issued by U.S. companies and by the U.S. government and its agencies.

(b)	The mutual fund balance in the U.S. Retiree Healthcare Plan is invested in the following categories: 41% in the common stock of large-cap U.S. companies, 24% in the common stock of international growth companies and 35% in fixed income bonds of U.S. companies and U.S. government.

(c)	Primarily represents deposit account funds held with various financial institutions.

(d)	The mutual fund balance in the Non-U.S. Pension Plans is primarily invested in the following categories: 58% in international bonds, 32% in the common stock of international companies, 1% in mortgages and real estate and 9% in various other global investments.

(e)	Amount represents bank and insurance guaranteed investment contracts.

(f)	The mutual fund balance in the U.S. Pension Plans are invested in the following categories: 35% in the common stock of large-cap U.S. companies, 38% in the common stock of international growth companies and 27% in fixed income bonds issued by U.S. companies and by the U.S. government and its agencies.

(g)	Primarily represents money market funds held with various financial institutions.

(h)	The mutual fund balance in the U.S. Retiree Healthcare Plan is invested in the following categories: 38% in the common stock of large-cap U.S. companies, 19% in the common stock of international growth companies and 43% in fixed income bonds of U.S. companies and U.S. government.

(i)	The mutual fund balance in the Non-U.S. Pension Plans is invested in the following categories: 56% in international bonds and 30% in the common stock of international companies, 8% in mortgages and real estate and 6% in various other global investments.

The following table summarizes the changes in fair value of the Level 3 retirement plan assets for the years ended December 31, 2017 and 2016 (in thousands):


	Insurance Guaranteed Investment Contracts
Fair value of assets, December 31, 2015	$	38,943
Net purchases (sales) and appreciation (depreciation)		6,150

Fair value of assets, December 31, 2016		45,093
Net purchases (sales) and appreciation (depreciation)		6,870

Fair value of assets, December 31, 2017	$	51,963

The weighted-average assumptions used to determine the benefit obligation in the consolidated balance sheets at December 31, 2017, 2016 and 2015 are as follows:


	2017						2016						2015
	U.S.			Non-U.S.			U.S.			Non-U.S.			U.S.			Non-U.S.
Discount rate		3.94	%		1.79	%		4.41	%		1.71	%		4.59	%		2.23	%
Increases in compensation levels		**			2.43	%		**			2.47	%		**			2.45	%

**	Not applicable

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The weighted-average assumptions used to determine the net periodic pension cost at December 31, 2017, 2016 and 2015 are as follows:


	2017						2016						2015
	U.S.			Non-U.S.			U.S.			Non-U.S.			U.S.			Non-U.S.
Discount rate		4.28	%		1.80	%		4.42	%		2.20	%		3.71	%		1.98	%
Return on plan assets		6.53	%		2.64	%		6.47	%		2.74	%		6.35	%		2.58	%
Increases in compensation levels		**			2.63	%		**			2.50	%		**			2.57	%

**	Not applicable

To develop the expected long-term rate of return on assets assumption, the Company considered historical returns and future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio and historical expenses paid by the plan. A one-quarter percentage point increase in the assumed long-term rate of return on assets would decrease the Company’s net periodic benefit cost for the Waters Retirement Plan by less than $1 million. A one-quarter percentage point increase in the discount rate would decrease the Company’s net periodic benefit cost for the Waters Retirement Plan by less than $1 million.

During fiscal year 2018, the Company expects to contribute a total of approximately $4 million to $10 million to the Company’s defined benefit plans. Estimated future benefit payments from the plans as of December 31, 2017 are as follows (in thousands):


	U.S. Pension and Retiree Healthcare Plans		Non-U.S. Pension Plans		Total
2018	$	9,385	$	2,396	$	11,781
2019		10,114		1,563		11,677
2020		10,287		2,060		12,347
2021		10,777		2,089		12,866
2022		10,749		2,963		13,712
2023 - 2027		58,789		18,217		77,006

16 Business Segment Information

The accounting standards for segment reporting establish standards for reporting information about operating segments in annual financial statements and require selected information for those segments to be presented in interim financial reports of public business enterprises. They also establish standards for related disclosures about products and services, geographic areas and major customers. The Company’s business activities, for which discrete financial information is available, are regularly reviewed and evaluated by the chief operating decision maker. As a result of this evaluation, the Company determined that it has two operating segments: Waters® and TA®.

The Waters operating segment is primarily in the business of designing, manufacturing, distributing 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, distributing and servicing thermal analysis, rheometry and calorimetry instruments. The Company’s two operating segments have similar economic characteristics; product processes; products and services; types and classes of customers; methods of distribution; and regulatory environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information regarding the one reportable segment of the Company.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net sales for the Company’s products and services are as follows for the years ended December 31, 2017, 2016 and 2015 (in thousands):


	2017		2016		2015
Product net sales:
Waters instrument systems	$	988,750	$	943,218	$	895,626
Chemistry consumables		372,157		345,413		317,941
TA instrument systems		191,442		171,665		171,689

Total product sales		1,552,349		1,460,296		1,385,256
Service net sales:
Waters service		686,656		639,432		593,301
TA service		70,073		67,695		63,775

Total service sales		756,729		707,127		657,076

Total net sales	$	2,309,078	$	2,167,423	$	2,042,332

Geographic sales information is presented below for the years ended December 31, 2017, 2016 and 2015 (in thousands):


	2017		2016		2015
Net Sales:
United States	$	669,274	$	665,280	$	656,361
Europe		636,472		577,257		555,886
Asia:
China		387,059		331,354		278,600
Japan		167,258		167,977		145,184
Asia Other		308,300		283,653		272,179

Total Asia		862,617		782,984		695,963
Other		140,715		141,902		134,122

Total net sales	$	2,309,078	$	2,167,423	$	2,042,332

The Other category includes Canada, Latin America and Puerto Rico. Net sales are attributable to geographic areas based on the region of destination. None of the Company’s individual customers accounts for more than 2% of annual Company sales.

Long-lived assets information at December 31, 2017 and 2016 is presented below (in thousands):


	2017		2016		2015
Long-lived assets:
United States	$	186,344	$	207,062	$	192,352
Europe		136,440		114,848		128,189
Asia		24,774		14,376		11,868
Other		1,720		832		946

Total long-lived assets	$	349,278	$	337,118	$	333,355

The Other category includes Canada, Latin America and Puerto Rico. Long-lived assets exclude goodwill, other intangible assets and other assets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

17 Unaudited Quarterly Results

The Company’s unaudited quarterly results are summarized below (in thousands, except per share data):


	First			Second			Third			Fourth
2017	Quarter			Quarter			Quarter			Quarter			Total
Net sales	$	497,969		$	558,250		$	565,584		$	687,275		$	2,309,078
Costs and operating expenses:
Cost of sales		211,095			229,627			235,892			270,453			947,067
Selling and administrative expenses		130,524			130,190			135,194			148,795			544,703
Research and development expenses		30,752			32,937			33,782			35,122			132,593
Litigation provisions		—			10,018			—			1,096			11,114
Purchased intangibles amortization		1,729			1,693			1,682			1,639			6,743
Acquired in-process research and development		5,000			—			—			—			5,000

Total costs and operating expenses		379,100			404,465			406,550			457,105			1,647,220

Operating income		118,869			153,785			159,034			230,170			661,858
Interest expense		(12,725	)		(14,083	)		(14,750	)		(15,281	)		(56,839	)
Interest income		7,343			8,370			9,516			10,849			36,078

Income before income taxes		113,487			148,072			153,800			225,738			641,097
Provision for income taxes		7,930			16,250			17,696			578,910			620,786

Net income (loss)	$	105,557		$	131,822		$	136,104		$	(353,172	)	$	20,311

Net income (loss) per basic common share		1.32			1.65			1.71			(4.44	)		0.25
Weighted-average number of basic common shares		80,073			79,979			79,712			79,454			79,793
Net income (loss) per diluted common share		1.31			1.63			1.69			(4.44	)		0.25
Weighted-average number of diluted common shares and equivalents		80,769			80,756			80,521			79,454			80,604


	First			Second			Third			Fourth
2016	Quarter			Quarter			Quarter			Quarter			Total
Net sales	$	475,246		$	536,560		$	526,830		$	628,787		$	2,167,423
Costs and operating expenses:
Cost of sales		201,151			220,379			218,344			251,579			891,453
Selling and administrative expenses		129,351			129,581			123,861			130,238			513,031
Research and development expenses		29,438			32,578			30,418			32,753			125,187
Litigation provisions		—			—			—			3,524			3,524
Purchased intangibles amortization		2,644			2,411			2,476			2,358			9,889

Total costs and operating expenses		362,584			384,949			375,099			420,452			1,543,084

Operating income		112,662			151,611			151,731			208,335			624,339
Interest expense		(10,119	)		(10,983	)		(11,707	)		(12,102	)		(44,911	)
Interest income		4,087			4,827			5,426			6,346			20,686

Income before income taxes		106,630			145,455			145,450			202,579			600,114
Provision for income taxes		12,578			17,238			20,594			28,201			78,611

Net income	$	94,052		$	128,217		$	124,856		$	174,378		$	521,503

Net income per basic common share		1.16			1.59			1.55			2.17			6.46
Weighted-average number of basic common shares		81,275			80,804			80,677			80,366			80,786
Net income per diluted common share		1.15			1.57			1.53			2.15			6.41
Weighted-average number of diluted common shares and equivalents		81,974			81,455			81,388			80,954			81,417

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company typically experiences an increase in sales in the fourth quarter, as a result of purchasing habits for capital goods of customers that tend to exhaust their spending budgets by calendar year end. Selling and administrative expenses are typically higher after the first quarter in each year as the Company’s annual payroll merit increases take effect. Selling and administrative expenses will vary in the fourth quarter in relation to performance in the quarter and for the year. In the third quarter of 2017 and first quarter of 2016, the Company recorded $4 million and $7 million of stock compensation expenses, respectively, in selling and administrative expenses related to the modification of certain stock awards upon the retirement of senior executives.

In the first quarter of 2017, the Company recorded a $5 million charge related to acquired in-process research and development (see Note 2). In 2017 and in fourth quarter of 2016, the company recorded litigation provisions of $11 million and $4 million, respectively (see Note 10). In the fourth quarter of 2017, the Company recorded a $550 million income tax provision as a result of the 2017 Tax Act (see Note 9).

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